While it may not be the primary accounting method that is used by most companies these days, when it comes to properly managing their finances, there are still many advantages to cash basis accounting according to Carlos Hank Rhon. Read on for a look at the reasons why you may want to consider using it for your small business accounting needs.
When using cash basis accounting the process is pretty straight forward. The business will record a transaction only after the cash has been received or debited from the account. When cash has been received the revenues are recorded and with cash has been paid out the expenses are recorded. One of the biggest advantages to cash basis accounting is the fact that it is very simple and easy to use and requires very little actual accounting skills. This is why it is one of the methods preferred by many small businesses.
One of the major disadvantages when it comes to cash basis accounting would have to be that revenues and expenses are not always properly matched when it comes to recording everything on the income statements.
The equation that is used in cash basis accounting is Assets = Liabilities + Equity. This accounting equation should always remain in balance after each transaction has taken place. A transaction may affect only one or all three elements of the cash basis accounting equation; however this equation will always need to balance out in order for the results to be correct. Since this accounting method is less complex than other popular methods such as accrual accounting, it is more commonly used in small businesses.
While it may be considered to be one of the more complex forms of accounting, notes Carlos Hank Rhon, accrual accounting is the best way to record the performance status of a company’s financial situation over a period of time. It has the added benefit of being able to pinpoint all of the ups and downs that go along with the financial side of running a business. One of the biggest advantages to practicing accrual accounting within your business is that it is so easily interpreted from one individual to the next. This provides the owner of the company to be able to transfer the accrual accounting statements to another financial advisor if any issues should occur and everyone involved will be able to read the documents clearly without any hesitation.
No matter what size your company may be, you can use accrual accounting to sort out your finances easily explains Carlos Hank Rhon. This has been proven to be the very best way to track your financial expenses and profits and it is the preferred method of many companies out there today both large and small. If you own a large corporation that needs continuous funds and a very stable cash flow in order to make ends meet every quarter, then you need an accounting process like accrual accounting in order to make sense of all the financial activity that is going on within the company.
The great thing about this form of accounting is the fact that it overstates revenue as opposed to how cash based accounting works. Accrual accounting records your company’s income as the company earns it and not when they receive the actual payment. This helps to keep a solid cash flow in tact at all times for your company which can be a very good thing.
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Carlos Hank Rhon - Carlos Hank Rhon is Chairman of the Board of Grupo Financiero Interacciones. Carlos Hank Rhon is one of Mexico's top investment bankers. Carlos Hank Rhon: commercial business lending.
For more information please visit www.carlosrhonhank.com/
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